24 June 2016

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New calculations from the Danish Bankers Association, the Association of Danish Mortgage Banks and the Danish Mortgage Banks' Federation show that Danish banks and mortgage institutions will need to raise additional capital in the region of DKK 130 billion, if the Basel IV requirements are introduced in their current form.

It will have far-reaching consequences for the financial sector and Danish society.

-Imagining that this will not be significant for lending is a pipe dream. Lending will simply become more expensive for private consumers and companies. This is bad for the economy and employment,” the CEO of the Danish Bankers Association, Ulrik Nødgaard, says.

DKK 130 billionThe capital requirements have proven to be much higher than the DKK 85 billion that the Danish Bankers Association estimated in December. The figure is now DKK 130 billion. The new figures are based on factual reports from members of the Danish Bankers Association and the Association of Danish Mortgage Banks and are thereby more precise. We have also learnt more about the configuration of the Basel requirements.

“It will be extremely expensive and will impose completely unreasonable and unjustified costs on Danish homeowners. The Basel requirements do not only hit homeowners; companies will also be hit hard,” says Ane Arnth Jensen, CEO of the Association of Danish Mortgage Banks.

Joint consultation responseThe Danish Bankers Association, the Association of Danish Mortgage Banks and the Danish Mortgage Banks' Federation submitted a joint consultation response to the Basel Committee on Banking Supervision (BCBS). One of the main points is that the considerable floor requirement, that the scene is currently set for, will lead to skewed incentive in relation to banks and mortgage institutions’ lending.

- The capital floor basically means that it will cost the same for banks, no matter what they are lending money for. Therefore, we fear that lending will glide away from safe segments to more risky branches, which seems to be the complete opposite of the stability that the BCBS wants,” says Ulrik Nødgaard.

- The proposal from the BCBS will cost growth and employment across all of Europe. Before long, the EU is expected to introduce a leverage requirement that can contribute to solving the problems that the BCBS highlights. Solid supervision should also be ensured with internal models in financial companies,” Ane Arnth Jensen adds.

Together with the Association of Danish Mortgage Banks and the Danish Mortgage Banks' Federation, the Danish Bankers Association held a briefing in Brussels on Wednesday 22 June, where politicians and civil servants from all over Europe heard about the Danish calculations and the socio-economic consequences.

Participants of the meeting included Danish members of the European Parliament Morten Messerschmidt (the Danish Peoples’ Party), Jeppe Kofod (Danish Social Democrats) and Bendt Bendtsen (the Conservative People's Party).

Facts: The Basel Committee on Banking Supervision (BCBS) has submitted a proposal for new recommendations on increased capital requirements for the world’s banks. It is now up to the European Commission to decide whether the proposals will become EU legislation and, if necessary, the form in which they will be introduced.

The calculations are part of an impact study, in which the Danish Bankers Association and the Association of Danish Mortgage Banks have calculated the expected consequences of implementing the Basel IV requirements, which have been proposed by the BCBS.

The data is based on reports from Danish IRB institutions from quarter four of 2015, with respectively 60%, 80% and 100% taken as starting points for capital floors. Our assumption is a floor requirement of 80%, which equates to a capital requirement of an additional DKK 130 billion.

The IRB institutions include Danske Bank, Nordea Bank Danmark, Nykredit, Jyske Bank, Sydbank, Spar Nord Bank and Lån & Spar Bank and the figures are at a group level.The effect of capital requirements on floor requirements of 60-90% is shown in the graph below.

The primary effect of the Basel IV requirements will be on credit risk i.e. lending, while a smaller proportion of the capital requirements are a result of operational and market risks. It must be emphasised that the uncertainty of the latter calculations is larger and reservations have been made in the figure of DKK 130 billion.

The fact that the calculations today show a markedly higher requirement than the DKK 85 billion, which was presented in December, is due to more factors. Primarily, the data is better, as it is based on specific reports from institutions and we have subsequently fully factored in the effects of the new standard method, as well as market and operational risks.

If the results of the analysis are run through a simple ADAM model, we can gain an indication of what the capital requirements will mean for employment. The model shows that it will cost 10,000 – 15,000 jobs in Denmark.